Published: October 5, 2012 at 9:20 am

Moody’s recently announced that it is continuing to review Regions Financial Corporation (NYSE:RF)’s financials for a potential upgrade to its credit rating. While the financial sector as a while took severe hits from the financial crisis, much of the consumer anger is aimed at large national banks such as Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C); regional banks are generally seeing less blame for the poor economy and therefore considerably better sentiment from investors. Regions currently has a market capitalization of nearly $11 billion as its stock price is up 74% in 2012 (though it is still down 76% from its level from five years ago).

Interestingly, Regions still looks cheap based on its valuation multiples. It trades at a substantial discount to the book value of its equity, with a P/B ratio of 0.7, and at 9 times forward estimates. This is a bit similar to what we see at large national banks. We would note that it is highly exposed to the broader economy at a beta of 2.3 and its dividend yield of 0.6% is lower than what we see at some other banks. In its most recent quarter Regions had its net interest income come out about even with the numbers from the same period last year (interest income and expenses were both down), with the company showing an improvement in net income which was driven by lower provisions for loan losses.

Billionaire James Dinan’s York Capital Management initiated a position of 9.6 million shares in Regions Financial during the second quarter (see more stock picks from York Capital Management), suggesting confidence in the company. Robert Pohly’s Samlyn Capital increased its own stake in Regions by 54% to a total of about 13 million shares (find more stocks that Samlyn liked). Arrowstreet Capital had the largest position in the stock at the end of June out of all the funds in our database of 13F filings; it owned about 23 million shares.

The best peers for Regions are fellow regional banks with a focus on the Southeastern U.S. Regions is by far the largest of these: its market cap is about four times that of its two largest industry peers, Hancock Holding Company (NASDAQ:HBHC) and First Horizon National Corporation (NYSE:FHN). These peers are remarkably similarly priced, and trade at premiums to Regions: both carry P/B ratios of 1.1, and both trade at 12 times analyst consensus for their 2013 earnings per share. First Horizon even took steep losses last quarter, stemming from a decline in revenue, and is expected to finish this year with EPS of zero. We don’t think that it deserves to trade at a premium to Regions in relation to the banks’ forward earnings. Hancock’s business has been doing well- both revenue and earnings up strongly in the second quarter versus Q2 2011- and with its 3.1% dividend yield significantly higher than Regions’, it may deserve something of a premium.

We can also compare Regions to the more popular value plays in the banking industry, Bank of America and Citigroup. Trading at half the book value of their equity, we’ve been attracted to them in the past despite poor consumer sentiment towards their businesses. Bank of America, for example, was embroiled in controversy last year over its plan to raise debit card fees (which they eventually had to drop). Bank of America, based on forward earnings estimates, is more expensive than Regions in that department at a P/E of 10 (though we’d note that its $100 billion market cap dwarfs that of Regions). Citi trades at 8 times forward earnings estimates, and so it is cheaper by that metric as well, though its business has been in decline recently.

Of course Citi and Bank of America aren’t just national banks- the primary problem they face is the European financial crisis. If investors are willing to take a little less in terms of value in order to better shield themselves from potential downsides in Europe in the future, Regions or Hancock could make good alternatives which still look like value stocks.

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